Commentary | Getting the Best Deal

by

There has been much talk about making U.S. weapon systems “affordable.” We most certainly do have a right to expect to receive value for our money. The question seems to be, are we getting it? Many in the Department of Defense (DoD) acquisition leadership seem to believe that we are not. Congress most certainly does not think that we are. My belief is that once the new space systems (Advanced Extremely High Frequency, Space Based Infrared System and GPS 3) have the opportunity to demonstrate their capabilities to the warfighter, there will be little doubt that we are the beneficiaries of a quality acquisition system that, in the end, provides an incredible product. We haven’t heard ourselves described as the “Centers of Excellence” for some time now, but my expectation is that that will change in the near future as these new systems demonstrate their enhanced technical capabilities.

Why do I believe that to be true? As proof, I provide several examples, although there are many more that could be given, of the effectiveness of the DoD acquisition system. No. 1 would be the GPS program, which has given the warfighter, and also the commercial, civilian population, an incredible capability that is the stuff of legend. The system is truly ubiquitous and few individuals would question it to have been an incredible success story. However, if we go back to the initial development phase of that system, we would find that it was fraught with criticism, too costly, too much behind schedule and suffering technical challenges that seemed hopeless to conquer.

Don’t buy it? Well how about the Defense Support Program, a system that has provided the warfighter with tremendous capabilities. It was first developed to provide missile warning capabilities during the height of the Cold War. It too went through developmental challenges with critics warning that it would “break the bank” for the DoD and could not possibly overcome the technical challenges associated with extending surveillance into space. Perhaps people have forgotten many of the challenges because the system was classified until well into its operational phase and people were not given visibility into the program’s cost, schedule and technical challenges.

Still not convinced? Well, how about the Defense Meteorological Satellite Program weather satellite, which was fielded during the 1960s and has performed so well that it is outlasting its predicted life expectancy by many years, giving the DoD several additional years to develop a follow-on satellite to replace it. When it was first developed many people did not believe it could provide the capabilities that it has clearly exceeded.

Our next generation of major programs is currently in the production and deployment phase, and their “underwear is showing” in that many of the technical, cost and schedule challenges are the gist of Government Accountability Office reports. Several have alleged that the DoD has wasted billions in the development of these systems.

I have not seen a program director who was satisfied with the programmatic overruns and Nunn-McCurdy breaches that many of our systems have faced over the past 15 to 20 years. Having said that, I am also confident that government program managers and contractors expended their due diligence in attempting to meet often unrealistic cost, schedule and technical goals set for these systems and incorporate efficiencies in fielding the final product. Over time, we will have the opportunity to see how the new systems perform, and I believe that they will do much to regenerate our history of developing incredible systems for the warfighter.

We are moving toward another period of fiscal frugality in the development of our next generation of DoD weapon systems, and it will not be the first time that we have faced these circumstances and attempted to adapt to this reality. Each time that this has happened in the past, we have attempted to resolve the crisis by moving to more commercial-like ways of buying. The movement toward affordability has been a consistent theme, and several administrations have incorporated a myriad of ideas that were designed to reduce costs and increase effectiveness, acquisition reform being the most recent example of affordability initiatives during the 1990s.

A suggestion that has been gathering steam in Washington is to have the program offices get more involved at the major subcontractor level within sole-source proposals. This would provide the government with visibility into how much profit the prime is allowing the major subcontractors. What is the actual profit rate that major subcontractors have experienced over the past five years or so? In accordance with the Federal Acquisition Regulation, the prime contractor is required to provide the government with an assessment of the subcontractor’s proposal, but to some this is akin to asking the fox to guard the chicken coop. The prime will be allowed to have the cost of the subcontractor — including profit — as an allowable cost against the contract. These costs are the basis for the prime’s profit, and so it is asking the prime to reduce its cost if it reduces the subcontractor’s costs — including profit. Why would the prime act against its own interests this way?

In order to determine whether the subcontractor has received undue profit as a result of this situation, the government is now asking for the data to determine the actual profit rate that the subcontractor received. On an incentive contract, the subcontractor would receive additional profit in the event of an underrun. This would be relatively easy to determine. The additional consequence of this underrun is that the prime contractor would also underrun its contract, increasing its profit. If the prime had a firm, fixed-price subcontract, any underrun would be hidden in the price since there is no sharing. This means that every dollar of underrun on that contract would be a dollar of profit. This has no impact upon the prime, because the prime’s contract is a fixed cost to the government against which the prime has received profit.

What is a suggestion for addressing this conundrum? Perhaps it would be a better plan to provide an incentive to the prime contractor to reduce the cost to the government of the subcontractor, rather than inflate it. This could be accomplished by increasing the fee applied against the subcontractor based upon the job that the prime did in reducing the cost to the government of the subcontracted effort. This might involve both positive and negative incentives for both prime and subcontractor.

All too often, we are not aware of the unintended consequences of our actions. Contractors react to our incentives in different ways based upon their individual circumstances. Some rush out to negotiate their major subcontracts prior to negotiating with the government, while others wait until negotiations with the government are completed before negotiating more stringent arrangements to their subcontractors.

Which way is preferred by the government? It depends, although the ultimate goal is a fair and reasonable deal for both prime and subcontractor. Often, the best deal is the one in which both parties walk away feeling they didn’t get everything they wanted but they did get everything that they needed.

We are continually on the lookout for ways to reduce costs, while ensuring that mission success remains paramount. We have to ensure that in the rush to minimize cost, we do not add undue risk to the ultimate goal, which is to provide the very best systems to the warfighter.

 

James Gill is a graduate of the University of Southern California’s Defense & Strategic Studies Program, a former professor in the CSSB National Security Studies Program and is currently employed at the U.S. Space and Missile Systems Center, Los Angeles Air Force Base. These views are solely those of the author and do not represent those of the U.S. Air Force.